COMMENTARY

”It is clearly much lower than anticipated. Things are moving in the right direction, it is positive and encouraging for the Reserve Bank of India.

”However, other factors will have to fall into place before the RBI eases again, and that includes continuation of structural reforms and what the budget brings.

“The RBI will also keep a close watch on the consumer price inflation and the fiscal deficit.”

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

”We seem to be looking at continued deceleration in manufacturing product inflation. I am not sure where the relief on fuel has come from, one has to look at the fine print.

”However, with both the headline inflation and manufacturing coming down, we are looking at a sharp and sustained downward trend, which should give the RBI the elbow room to go ahead at least with a couple of more rate cuts in the first half itself perhaps in March and April.

“I am surprised at the fuel index, I thought it would be much higher.”

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

“Acute slowdown in demand is obvious from the manufacturing products inflation at 4.8 percent and its core component at 4.1 percent. Today’s inflation reading combined with further contraction in industrial production in December fortifies my view that RBI will have to reduce rates in the March policy by at least 25 bps.”

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI, MUMBAI

“The Reserve Bank of India is unlikely to cut rates in the mid-quarter policy in March 19. The central bank will be jittery over the high food prices, and the consumer price inflation. They will wait for sometime before doing another rate cut. They will also take into account the fiscal situation. We expect another rate cut in the annual policy.”

SIDDHARTHA SANYAL, INDIA ECONOMIST, BARCLAYS CAPITAL, MUMBAI

”Given that the downside surprise is much lower for core inflation than headline inflation, it looks like the fuel group price increase has not been factored into the headline number and will be added in the numbers going ahead.

“The RBI is aware of easing inflation but they are worried about current account deficit. I think the GDP print will be more important. We still maintain a 75 bps rate cut view over a period of time going ahead.”

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI

“The number is lower than expected and manufacturing inflation has surprised on the downside. It is interesting to note that something in commodities like sugar has pushed manufacturing product inflation lower. And core has marginally corrected further to 4.1 percent from 4.2 percent. With this inflation print, we are still maintaining 25 basis points call of a rate cut from RBI on March 19. There is at least a positive on WPI although retail CPI is still elevated.”

ANJALI VERMA, ECONOMIST, PHILIPSCAPITAL, MUMBAI

”It should bode well for RBI. Our expectation is that inflation will ease more to 5.5-5.8 percent by fiscal year end. However, the RBI is also now worried about other variables like current account and fiscal deficits in policy making.

“My call is a rate cut will be likely in March or April by another 25 basis points.”

UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI

“The inflation number for January is a pleasant figure. The moderating core inflation despite hike in the diesel prices for bulk consumers in the middle of the month would create room for RBI to cautiously cut the repo rate by 25 bps in the March policy.”

SHAKTI SATAPATHY, FIXED INCOME ANALYST, AK CAPITAL, MUMBAI

”The print is more in line with our expectation and a result of lower readings in crude and manufacturing indices. Today’s number might give a short-term respite for the forthcoming repo cut in the March RBI policy.

“However, the central bank would adopt a cautious approach resulting from consistent worries over imported inflation and higher current account deficit. We expect the bonds to trade rangebound with a downward bias in yields until March primarily in anticipation of a rate cut and timely OMOs (open market operations).”

“This shows that finally inflation is easing and fits with the growth slowdown. I think March inflation will be lower than RBI’s projection and that should give RBI the comfort to cut rates by 25 basis points in March. Also, the revision trends are softening and so there could be a marginal upward revision if at all, to the January number. This number will strengthen the rate cut expectations going ahead.”

MARKET REACTION

The 10-year government bond yield fell 3 basis points to 7.81 percent after the data.

The one-year OIS swap rate was at 7.60 percent, according to traders, down 4 bps from its previous close and down about 2 bps from beforehand.

BACKGROUND

- Annual consumer price inflation accelerated to 10.79 percent in January from the previous month, government data showed on Tuesday, making retail inflation in India the highest among the BRICS group of emerging economies - Brazil, Russia, China, and South Africa.

- Trade deficit rose to $20 billion in January from $17.7 billion in the previous month as imports surged while exports rose only slightly, adding pressure to a widening current account deficit and limiting the scope for further interest rate cuts by the central bank.

- Current account deficit is likely to reach a record high in 2012/13, the RBI governor warned, a gap which the bank said previously needed to shrink for it to lower borrowing costs.

- Industrial production unexpectedly shrank for a second straight month in December, weighed down by weak investment and consumer demand, casting doubt on Finance Minister P. Chidambaram’s view that Asia‘s-third largest economy is showing signs of recovery.

- Investment malaise is thwarting quick economic rebound and India is on course to end the 2012/13 fiscal year in March with its slowest growth in a decade at 5.0 percent.

- The RBI lowered its key policy rate for the first time in nine months in January, but struck a cautious note on further easing as it waits to see how the government’s upcoming budget aims to bring a bloated fiscal deficit under control.